Wall Street takes county to woodshed

Birmingham, Ala.


KAI RYSSDAL: Some county officials in Alabama got taken to woodshed today. Wall Street's more than a little concerned over Jefferson County's mountain of debt. Back in the mid-90's the county issued more than $3 billion worth of bonds to pay for a new sewer system. But now the loan might end up dragging Jefferson, which includes Birmingham, the state's biggest city, into the gutter. From WBHM in Birmingham, Andrew Yeager reports.

ANDREW YEAGER: Six years ago, the county swapped its sewer bonds for variable and auction-rate securities. When the subprime mortgage mess hit, the county's interest payments went from a trickle to a gusher.

Bettye Fine Collins is president of the county commission.

Bettye Fine Collins: We've had nothing but just situations that have worsened almost daily. So we certainly hope that the market will take a turnaround.

But the frozen auction-rate securities market shows no signs of thawing. Collins says the county is on the verge of default. County commissioners have been squabbling about what to do since April.

Kyle Whitmire covers local government for Birmingham Weekly. He says Alabama Governor Bob Riley stepped in recently and forced the commissioners to find some common ground.

Kyle Whitmire: Just to have been a fly on the wall at the Jefferson County Courthouse this past week -- it would have been a blast.

Whitmire says the governor's now warning lenders that the county could go bankrupt. That could mean big losses for the banks which include JP Morgan and Bank of America.

Whitmire: They're sort of playing chicken with the banks again now. They're giving the banks and the insurers something to lose. So, actually, now they have more incentive to come back and negotiate a little bit.

If the county files for protection from its lenders, it'll be the biggest municipal bankruptcy in American history. Some commissioners fear it'll stigmatize the county and make it difficult to borrow in the future. But refusing to file for bankruptcy will be expensive.

The penalties and increased interest could push the county's payments up to around $50,000 an hour.

In Birmingham, Alabama, I'm Andrew Yeager for Marketplace.

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We individuals have another option without going bankruptured, we can let the lender repossess the car or the house, and may be able to walk away owing nothing, even if on paper the property did not cover the debt. Why not let the bondholders own the sewer system and privatize it? They could probably run it better than the county:-)

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